Question

(FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

1. GAAP is the term used to indicate the whole body of FASB authoritative literature.
2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.
3. The primary governmental body that has influence over the FASB is the SEC.
4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

Short answer

1.True.

2.False.

3.True.

4.False.

Step-by-step solution

Meaning of GAAP

GAAP refers to Generally Accepted Accounting Principles. It specifies the rules, standards, and methods needed to describethe accepted accounting practices at a specific time; it comprises both broad guidelines and comparatively detailed practices and procedures.

Explanation for statement ‘1’

The statementis true. The hierarchy of Generally Accepted Accounting Principles (GAAP) recognizes the practices and conventions that are most authoritative for a specific case or problem.

Explanation for statement ‘2’

The statementis false. This is because any company claiming compliance with Generally Accepted Accounting Principles (GAAP) must adhere to all standards and interpretations, consisting of disclosure requirements.

Explanation for statement ‘3’

The statementis true. The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) are responsible for the administration and formation of Generally Accepted Accounting Principles (GAAP). The Securities Exchange Commission has the power to set as well as administer accounting standards.

Explanation for statement ‘4’

The statement is false. This is because while forming financial accounting standards, the Financial Accounting Standards Board (FASB) is dependent on two basic assumptions: the FASB should be reactive to the opinions and requirements of the full economic community;and it should work in complete view of the people with the help of a “due process” system that provides interested parties with full opportunity to make their opinion familiar.